Title and escrow basics form the foundation of every real estate transaction. Buyers and sellers often hear these terms but don’t fully understand what they mean or why they matter. Title refers to legal ownership of a property. Escrow acts as a neutral third party that holds funds and documents until a transaction closes. Together, they protect both parties and ensure a smooth transfer of property ownership. This guide breaks down how title and escrow work, why they’re essential, and what homebuyers should know before closing day.
Key Takeaways
- Title refers to legal ownership of a property, while escrow is a neutral third party that holds funds and documents until the transaction closes.
- A title search examines public records to uncover liens, easements, or ownership disputes before the sale proceeds.
- The escrow process typically takes 30 to 45 days and includes opening escrow, title search, loan approval, signing documents, and closing.
- Title insurance protects buyers from hidden ownership issues like forged documents or unknown heirs—it’s a one-time premium that lasts as long as you own the property.
- Combined title and escrow services usually cost between $1,000 and $3,000, which buyers can review on the closing disclosure.
- Understanding title and escrow basics helps homebuyers avoid legal complications and ensures a smooth property transfer on closing day.
What Is Title in Real Estate?
Title represents legal ownership of a property. When someone holds title to a home, they have the right to use, sell, or transfer that property. It’s different from a deed, the deed is a physical document that transfers title from one party to another.
A clear title means no other person or entity has a legal claim to the property. This includes liens, unpaid taxes, easements, or ownership disputes. Before any real estate transaction closes, a title search confirms the seller actually owns the property and can legally transfer it.
How a Title Search Works
A title company or attorney conducts the title search. They examine public records, court documents, and property histories. The goal is to find any issues that could affect ownership.
Common problems discovered during title searches include:
- Liens: Unpaid debts attached to the property, such as contractor liens or tax liens
- Easements: Rights granted to others to use part of the property
- Encroachments: Structures that cross property boundaries
- Ownership disputes: Claims from unknown heirs or previous owners
If problems exist, they must be resolved before the sale can proceed. This protects buyers from inheriting someone else’s legal headaches.
Understanding Escrow and How It Works
Escrow is a financial arrangement where a neutral third party holds money and documents during a transaction. In real estate, escrow protects both buyer and seller by ensuring neither party can walk away with funds or property before all conditions are met.
Think of escrow as a trusted middleman. The buyer deposits their earnest money into an escrow account. The escrow company holds it until closing. If the deal falls through for a valid reason, the buyer gets their money back. If everything proceeds smoothly, the funds transfer to the seller at closing.
The Escrow Process Step by Step
- Opening escrow: Once an offer is accepted, an escrow account opens. The buyer deposits earnest money.
- Title search and inspections: The title company searches for ownership issues while the buyer arranges inspections.
- Loan approval: The lender finalizes the mortgage and sends documents to escrow.
- Signing documents: Both parties review and sign closing paperwork.
- Closing: Escrow releases funds to the seller and records the deed with the county.
Escrow timelines vary but typically take 30 to 45 days for standard transactions. Cash purchases often close faster since they skip the mortgage approval process.
After closing, some homeowners continue using escrow accounts for property taxes and insurance. Their lender collects a portion of these costs each month and pays them when due. This prevents missed payments that could result in liens.
The Role of Title and Escrow Companies
Title and escrow companies serve distinct but related functions. Some companies handle both services, while others specialize in one area.
What Title Companies Do
Title companies research property histories and issue title insurance policies. Their responsibilities include:
- Conducting title searches
- Resolving ownership issues before closing
- Issuing title insurance to protect buyers and lenders
- Preparing title documents for recording
What Escrow Companies Do
Escrow companies manage the transaction process. They act as neutral parties and handle:
- Holding deposits and funds
- Collecting and distributing closing costs
- Ensuring all conditions are met before releasing funds
- Recording documents with the county
In many states, the buyer selects the title and escrow company. In others, the seller chooses. Real estate agents typically recommend companies they’ve worked with, but buyers can shop around for better rates.
Fees vary by location and transaction size. Title and escrow services combined usually cost between $1,000 and $3,000. These costs appear on the closing disclosure, so buyers can review them before signing.
Why Title Insurance Matters
Title insurance protects property owners from financial loss due to ownership disputes that weren’t discovered during the title search. Even careful searches can miss hidden problems.
Two types of title insurance exist:
- Lender’s title insurance: Protects the mortgage lender’s interest in the property. Lenders require this policy.
- Owner’s title insurance: Protects the buyer’s investment. It’s optional but strongly recommended.
What Title Insurance Covers
Title insurance covers issues that existed before the policy was issued but weren’t found during the search. Examples include:
- Forged documents in the property’s history
- Unknown heirs who claim ownership
- Errors in public records
- Undisclosed liens from previous owners
Unlike other insurance types, title insurance requires only a one-time premium paid at closing. The policy remains in effect for as long as the owner or their heirs hold an interest in the property.
Premiums depend on the property’s purchase price and location. They typically range from $500 to $3,500. Given that a home is most people’s largest investment, this one-time cost provides significant peace of mind.
Without owner’s title insurance, buyers could face legal fees, settlement costs, or even lose their property to someone with a valid prior claim.
